Spatial Price Efficiency in the Urea Market

Abstract

Urea fertilizer is widely used in the U.S., however, most urea is not openly traded and formula pricing is common. This study measures the efficiency of spatial urea prices in the New Orleans-Arkansas River urea market and the New Orleans-Middle East urea market. The vector error correction model (VECM) and Baulch's (1997) parity bound model (PBM) are used. Nonlinearity testing finds no threshold effects. Thus, we do not include threshold values in our vector error correction models. Parameter estimates of vector error correction models show that violations of spatial price equilibrium are corrected faster in the Arkansas River-New Orleans urea market than the New Orleans-Middle East urea market. In the new Orleans-Middle East urea market, only New Orleans price makes long term adjustment to deviations from spatial equilibrium. Results from the parity bound model show that in the New Orleans-Middle East urea market, price spreads are greater than transportation costs about 23% of the time. So, the New Orleans-Middle East market is a moderately inefficient market rather than a perfectly efficient market.